FuturesTechs Blog

Yesterday’s low was 1135.50, which was more or less a hold of our S1 support at 1136.50, and was most definitely a hold of our first bold support at 1131.75.

We are still bullish then, and still hoping that 1150 will be taken out soon to see the market getting over this current bout of nerves.
Once through 1140 we can gun for 1174.75, the highest print we’ve seen in this one since May’s “flash crash”.

Below are today’s support and resistance levels, the importnat ones in bold type.

R7  - 1166.25

R6  - 1159.50

R5  - 1153.75

R4  - 1149.75

R3  - 1146.75

R2  - 1144.50

R1  - 1141.25

S1  - 1136.50

S2  - 1134

S3  - 1131.75

S4  - 1127.25

S5  - 1120.75

S6  - 1117.25

S7  - 1114.25

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The market looked damp right from the start yesterday, in fact even before the FTSE had opened the DAX and Stoxx had failed to hold gaps that they’d created with strong opens, so you could argue that the bulls had lost control of the impetus even before the FTSE opened.

But it never felt like it was going to be a big nasty down day, and sure enough we only sold off to 5545. We had bold support at 5548 as this is the Marabuzo line of the large green candle that we posted on Friday. So this has held, but may come under pressure again today.

We turn bearish below 5435; last week’s low.

We think the market is edgy and nervous for now. There is lots of volatility but little firm direction, which is the sort of thing one often sees at turning points.

Below are today’s support and resistance levels worthy of note.

WHAT DO WE THINK NOW?

At FuturesTechs we analyse 28 different markets each day and give our trading clients regular up to date analysis on the current thinking and market’s state of mind. We look at Bonds, Forex, Commodities and Equities. At the moment Stock Markets are the most interesting, providing the biggest conundrum for traders and operators.

We believe that Fundamental analysis is flawed (by not taking into account sentimenrt), and that most Economists get it wrong. A far more sensible way to look at the markets is to work out what the trend is, and stick with the trend, then do your best to spot (as early as possible!) any changes in trend.

One thing we’ve learnt over the years is that the market usually tops out when most people are getting bullish, and dashing in to get long, afraid to miss out. In other words when people are getting greedy. This could definitely be applied to Gold at present, and probably also to Equities!

The opposite situation creates bottoms and emerged in March when Equities bottomed out  -

Fear gripped the market and everyone ran for the door. We didn’t. We took a step back, and realised that many in the market had given up, that there were plenty of doomsayers talking the FTSE down to 2500. Our analysts said at the time that the market was nearing a bottom. In fact we said it on CNBC, so if you don’t believe us click below link to have a look.

There is a saying that “Harry Hindsight is the best trader in the world”, and we would suggest that if anyone says “I got long back in March” ask them to prove it!

In recent weeks we have been concerned that this up move is coming to an end, and despite the fact there is usually a “Santa Claus rally” we are still erring on the side of worrying about downside risk. We really haven’t gone very far since September, if you take a step back and look at things.

I used a Warren Buffett line last week in one of our reports and it sums up quite well everything I’ve said above.

“Be fearful when others are greedy and be greedy when others are fearful”.

He’s done quite well out of it!

We follow the trend, but are always looking out for when the market’s psychology gets to an extreme.

Feel free to ask for a Free Trial by clicking the link below. Don’t forget to click below as well to view our comment on CNBC back in March.

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Check out Clive Lambert’s March 4th CNBC appearance here.

‘Sell in May and go away, come again on St. Leger’s Day’, or so the ancient wisdom goes. According to convention, investors do well by exiting the stock markets during the quiet summer months, only returning in mid-September.

Not satisfied with old wives’ tales here at FuturesTechs Towers, we decided to do a little bit of empirical research and find out for ourselves if this had worked in years gone by.

In order to spice it up a little bit, and to add some “timing” to the whole affair, we also decided to consider the amendment offered by another technician (the excellent and well-respected Axel Rudolph at Dow Jones): “Sell in May and go away, come again on St. Leger’s Day so long as there is a Stochastic crossover sell signal.” Ooh-err!

The results?

It turns out that this rule hasn’t been too bad at all, looking back for the last 20 years.

We put the start of the summer period as the day of the first Stochastic crossover sell signal in May or, if there was none, as May 31^st. The end of the summer was defined as the day of the St. Leger Stakes, the horse racing meet in Doncaster that’s been running since the 18^th century, and which is always held in mid-September. We use the Slow Stochastic indicator with the typical parameters.

So here’s a simple comparison: the returns for each of the last twenty years (blue) versus the annualised returns for each summer (red):

Fig 1.

The chart shows that the red series was quite a bit lower than the blue series on a couple of occasions (1992, 1998, 2001, 2002, for example), meaning that summer returns were much worse than the annual returns in each of those years. And we also see that the years in which the summer significantly outperformed the year as a whole weren’t very common.

So now let’s compare the same annual returns versus the returns achieved by sitting out during the summer period (selling in May and coming back in September). The annual returns are in blue again, with the returns from the “Sell in May” strategy in purple:

Fig 2.

This shows that the returns from sitting out for the summer months were better than for the year as a whole in 1990, 1992, 1998, 2001, 2002, 2006, 2007 and 2008.

What’s also going on here, though, is that the returns from summer were greater than zero for 11 of the 20 years in question, so that for each of these years you were better off staying invested rather than sitting out. Even if the summer returns weren’t that great, they were better than the zero gained by doing nothing for that time.

In general, though, the records show that there has been some good success in leaving the fray for summer, as illustrated by this summary:

1989-2008                          Average Returns

Annual                                      6.03%

Summer (annualised)          -1.03%

Sell in May Strategy                7.39%

The average return for each of the past 20 years has been 6.03% but, by employing the Sell in May strategy, the average return rises to 7.38%. The average of the annualised returns for the summers has actually been negative.

Now let’s look at the suggested amendment to the rule, and use the Stochastic sell signal. We find that when you only sell out in the years when there was a sell signal, the strategy does improve a little. This is illustrated by Figure 3, where we simply stayed invested for the years when there was no signal:

Fig 3.

Waiting for a Stochastic sell signal meant that you would still have been protected from summer losses in 1990, 1992, 2001, 2002, 2006, 2007 and 2008 (you would have suffered pretty big losses last year anyway, of course). This strategy performed worse than simply staying invested for the year in 1989, 1991, 1993, 1995, 1997 and 2005. The average return from this strategy, however, is still an improvement on simply selling out (which was already an improvement on staying invested):

1989-2008                                  Average Return

Annual                                             6.03%

Sell in May                                      7.39%

Sell Signal Strategy                      7.49%

Looking exclusively at the years when there was a sell signal, the worst return (except for 2008) was -3%! Some people might consider this to be good value risk management, even if it means missing out on some growth during good years

Our summary box looking only at the years with a sell signal helps to prove how the rule made a big difference:

Sell Signal Years                     Average Return

Annual                                              5.75%

Summer (annualised)                  -3.64%

Sell in May Strategy                         8.01%

This isn’t a very formal analysis, of course, but could be worth thinking about. In terms of this year, we had a Stochastic sell signal for the FTSE on the 13^th of this month (the vertical line on the chart below).

Fig 4: Stochastic sell signal for the FTSE-100 index, 13^th May 2009

The market has gained a little more since the signal, but anybody who thinks that the rally is probably over now might take encouragement from the historical record of weak summer trading. That would make this an opportunity to get out, only coming back for race day in Doncaster next autumn.

Graham Neary (graham@futurestechs.co.uk)

We are often asked how we use Fibonacci retracements, and what time frames they are best used on.

Let’s look at the FTSE Futures chart right now to try and give a flavour of how they can help us.

Since last Tuesday (as we suspected, and as was flagged to our clients) we have seen a recovery rally in the FTSE from the lows just above 3450 set at the start of March.

There have been many commentators who are calling this a “bear market rally”, and are waiting for the first signs of weakness to pounce upon and use as a selling opportunity. As our customers know we’re not quite in this camp, but there you go. We have an article recently written in our members area that expands on our thoughts as to whether this is a market bottom or not.

Anyway, back to our magic Fibonacci numbers.

The Fibonacci retracements commonly watched are 38.2% and 61.8%. If a market has been selling off then we always call off the hounds on the down-leg if we can retake the 38.2% level, at which point we target a move to the 61.8% level. In this instance, as the market started rallying off the lows we looked up to see where the market would have taken back 38.2% of the weakness seen since the start of the year (see chart 1). This level was 3904. We got to here this morning… and promptly fell over.

Chart 1: FTSE Futures Daily Candlestick chart since the start of 2009

So does that mean we’re right back in bed with the bears and looking for a fresh test of the lows? It could well be, but the slightly more cautious can use Fibonacci levels on a shorter term chart to help them with that one as well, because it could be argued that unless we give back 38.2% of the recovery, then maybe the recovery is still going on!

So we start at the low and measure up to the high and find the 38.2% retrace of that move. This is 3738 (and coincides with Friday’s low) so we are using this level as a reference now to see what the market wants to do next. A break below here and sure, the bears are back in charge, and we’ll look to head back down, targeting 3625 (the short term 61.8% retracement) first, then 3443 (the year’s lows), as per the second chart, below.

Chart 2: FTSE Futures, Hourly Candlestick Chart, 9th - 18th March

So you can see we use Fibonacci levels on lots of different time-scales, and they can all have a use in telling us where we are, and what the market’s thinking.

Be safe,

Cheers,

Clive.